Generally when one defaults on a student loan, that loan is sold
to a collection agency. The original grantor of the loan usually sells the loan
for less than the balance due on the loan. Once the loan has been sold by the
grantor, the qualified student loan is considered to be paid off. With the
outstanding unpaid balance written off by the grantor. When that occurs the
grantor can issue a 1098-C to the borrower as a forgiveness of debt on the
unpaid balance of the loan. That unpaid balance is then fully taxable income to
the borrower.
For the collection agency that purchased the loan, it is no
longer a qualified student loan to the borrower. Nothing paid on this loan is
deductible. So the borrower will not be receiving a 1098-E or any other type of
tax reporting document, and can not deduct interest or any collection fees
imposed by the collector and paid by the borrower.
